Hedge high yield credit.
Pay once, get paid if credit sells off, and never post margin.
Per $1M of credit
Model pricesCrash0% to +20%
Pays only if credit ends the year worse than it started.
$27,000
You pay. The most you can lose.
$153,000
Paid back in the window from March 2008.
Full−30% to +20%
Moves with the index the whole way.
$300,000
You pay. The most you can lose.
$453,000
Paid back in the window from March 2008.
The window from March 2008
$1M of credit to hedge. The index first fell about 6%, then ended up 15%.
CDX protection+$153,000About $57,000 of margin calls during the early fall, before it paid.
Payer option spreadSame as CrashOnly from a dealer, under an ISDA, in sizes from $25M.
RAVA Crash+$126,000Paid $27,000 once, received $153,000. Nothing to post along the way.
Against CDX
CDXRAVA
To startA clearing broker and $10M eligibilityOnboarding
You payUpfront, a yearly coupon and daily marginOnce
If credit moves against youMargin callsNothing
Most you can loseCoupons, less upfront, plus mark to marketWhat you paid